Manish Marwah a Management Consultant and principal partner of Sapphire Consulting Group

October 30, 2008

Boom & Bust of Indian Real Estate Sector

Engulfing the period of stagnation, the evolution of Indian real estate sector has been phenomenal, impelled by, growing economy, conducive demographics and liberalized foreign direct investment regime. However, now this unceasing phenomenon of real estate sector has started to exhibit the signs of contraction.

What can be the reasons of such a trend in this sector and what future course it will take? This article tries to find answers to these questions….

Overview of Indian real estate sector

Since 2004-05 Indian reality sector has tremendous growth. Registering a growth rate of, 35 per cent the realty sector is estimated to be worth US$ 15 billion and anticipated to grow at the rate of 30 per cent annually over the next decade, attracting foreign investments worth US$ 30 billion, with a number of IT parks and residential townships being constructed across-India.

The term real estate covers residential housing , commercial offices and trading spaces such as theaters , hotels and restaurants , retail outlets , industrial buildings such as factories and government buildings. Real estate involves purchase sale and development of land , residential and non-residential buildings. The activities of real estate sector embrace the hosing and construction sector also.

The sector accounts for major source of employment generation in the country , being the second largest employer , next to agriculture. The sector has backward and forward linkages with about 250 ancilary industries such as cement , brick ,steel , building maetrial etc.

Therefore a unit increase in expenditure of this sector have multiplier effect and capacity to generate income as high as five times.

All-round  emergence

In real estate sector major component comprises of housing which accounts for 80% and is growing at the rate of 35%. Remainder consist of commercial segments office , shopping malls , hotels and hospitals.

·         Housing units : With the indian economy surging at the rate of 9 %  accompanied by rising incomes levels of middle class , growing nuclear familes , low interst rates , modern approach towards homeonership and change in the attitude of young working class in terms of from save and buy to buy and repay having contributed towards soaring housing demand.

Earlier cost of houses used to be in multiple of nearly 20 times the annual income of the buyers, whereas today multiple is less than 4.5 times.

According to 11th five year plan, the housing shortage on 2007 was 24.71 million and total requirement of housing during (2007-2012) will be 26.53 million. The total fund requirement in the urban housing sector for 11th five year plan is estimated to be Rs 361318 crores. The summary of investment requirements for XI plan is indicated in following table



Manish Marwah

Manish Marwah on Rupee Appreciation

October 30, 2008


Miilon dollar question- one of the most popular saying, might change in future to million rupees question if this present era of rupee appreciation continued to be on roll.

Indian economy is among the fastest growing economies of the world. The appreciation of rupee against dollar will prove out to be another huge addition to its economic prosperity and growth story. However the economic epidemics like poverty, unemployment etc cannot be dealt in short run.

From 2003-08 Indian market is booming in leaps and bounds, today after china India is 2nd fastest growing economy of the world with registering a growth rate of 9%. India is a trillion dollar economy and has become world’s 12th largest economy (2008 estimate). Now major question drifting in every Indian mind is “Rupee Appreciation”. The rupee appreciated by 9.8% against the US dollar during the previous financial year between April 3 , 2007 to January 16 2008.


FY 2007-08 (April 2007 –

January 2008)


(dec 2006 –dec 2007)

US dollar



U.K pound



Japanese Yen







The rupee appreciation against US dollar over the past 12 months on year to year basis (December 2006 – December 2007) was a higher 13.2 %. The appreciation of rupee against other major currencies was much less than against the US dollar.

India witnessed 2nd highest appreciation in its currency of 8.35% between January and June 2007 after 9.28 % of Brazil among the emerging economies that are in direct competition with Indian exporters and find themselves better off due to sharp rise in rupee value, revealed by ASSOCHAM eco pulse study.



Indian Rupee


Brazilian Real


Thailand Baht


Russian Rouble


Malaysian Ringgit


Chinese Yuan


Singapore Dollar


Bangladesh Taka


Pakistan Rupee


South Korea Won


Indonesian Rupiah



After having looked at these figures, the puzzle that floats in our mind, will the appreciation of rupee adversely affect our economic growth or it is an indicator of Indian growing economy?


The major reason which draws attention towards this rupee appreciation has been a flood of foreign-exchange inflows, especially US dollars. The surge of capital inflows into India has taken variety of forms ranging from foreign direct investment (FDI) to remittances sent back home by Indian expatriates. The main impact of these flows is as follows:

          FDI: India’s starring economic growth has created a large domestic market that offers promising opportunities for foreign companies. Moreover many companies rising competitiveness in many sectors has made it an attractive export base.

          ECB (external commercial borrowings):  Indian companies have borrowed enormous amounts of money overseas to finance investments and acquisitions at home and abroad. This borrowed money has returned to India, boosting capital inflows. In 2007-08 (april-september) external assistance (net) was placed at US $ 729 million as against US $ 386 million for the corresponding period in 2006-07 indicating a growth of 88.9%.

          Foreign portfolio inflows (FII’s):  India’s booming stock market embodies the confidence of the investors in the country’s corporate sector. Foreign portfolio inflows have played a key role in fuming this boom. Looking at the period of 2003-04 and 2006-07, the net annual inflow of funds by foreign institutional investors averaged US $ 8.1bn. Trends during first five months of 2007 indicate that this flood is continuing with net FII inflows amounting to US $4.6 bn. Another major source of portfolio capital inflows has been overseas equity issues of Indian companies via global depository receipts (GDR’s) & American depository receipts (ADR’s). Moreover FII’s registered in India has doubled to 1050 between March 2001 –march 2007 and now around 3,336 FII subaccounts also exist. FII equity flow has increased from $9.8 billion in 2004, $ 11 billion in 2005 to over 16 billion in 2007. The stock market has buoyed by strong corporate performance and these inflows have risen to 43% in 2007. However in mid-October RBI banned foreign investment via off shore derivatives called participatory notes (PN). These derivatives were used by foreign investors not registered in India (say hedge funds) to indirectly invest through registered investors. Between Mar 2004 – Aug 2007 the number of FII sub accounts that issued PNs rose from 14 to 34. Many believed that motive behind such RBI measure was to improve transparency of capital inflows and that restricting inflows via PN would have little or no impact on overall inflows coming into the country.


          Investment and remittances:  Another major source of capital inflows has been non-resident Indians (NRI’s) investing large amounts in special bank accounts. While NRI’s emotional connection to the country of origin is part of explanation to this, the attractive interest rate offered on such deposits also provide a powerful incentive. In 2006-07 NRI deposits amounted to US$ 3.8 bn. another large source of foreign exchange inflows has been remittances from huge number of Indians working overseas temporarily. Such remittances amounted to a colossal of US $ 19.6 bn in April-December 2006, a 15% year on year increase.




According to an industry analyst: every 10 paisa appreciation in rupee negates one dollar upward movement in international price.

Rupee appreciation brings jovial time for importers. Major imports to India are petroleum products, capital goods, chemical, dyes, plastics, pharmaceuticals, iron and steel, uncut precious stone, fertilizers pulp, paper etc. during the periods when dollar was getting strong against rupee, when 1$ = Rs 48 importers used to pay Rs 4800 for every $100. Since the beginning of the year 2007, rupee has appreciated nearly to about 10%. With value of rupee Rs 39.35 = 1$ for every $100 importer has to pay Rs 3935 by gaining a profit of Rs 865. This gain will bring about savings in cost which can be passed on to consumers, thereby becoming immediate tool for controlling inflation.

Over 10% appreciations in domestic currencies against dollar has thrown a new M&A opportunity for India Inc which wants to reach out world by acquiring going concern on a global scale. An ASSOCHAM study of 70 deals done in the first six months of the last financial year( 2007-08) , in which Indian firms undertook buyouts worth $ 14 billion , has  revealed that Indian companies would have saved Rs 6500 crore ($ 1.66 bn) just because of increase in rupee value.

Due to continuous decrease in dollar value, the US had remained the most favorite hunting ground for Indian companies. $2.9 bn valuation deals were announced with US companies in financial year 2007-08.

In terms of sector analysis steel rule the rest owing to the Tata-Corus deal. The overall valuation of M&A in steel sector was of around $5.4 bn.

Rupee appreciation is also welcomed by companies which have overseas borrowings. Significant levels of foreign currency –denominated, especially US denominated loans generate forex gains because of reduce interest payments which are occasioned by rising Indian rupee. Companies like Ranbaxy and L&T have been able to generate forex gains because they have substantial exposure to ECB’s.



With the ratio of 70:30 of imports and exports the major export destinations of India are USA, EU, Japan, Brazil and other Asian countries. Products which generate revenues from these destinations mainly compose of handicrafts, gems, jewellery, textiles, and ready made garments, chemicals and other related products. As seen for imports, if we analyze if an exporter is getting Rs 3935 now instead of Rs 4800 he is at a loss of Rs 865. This loss will lead to erosion of exporter’s profit margin and will affect their competiveness in global market.

In contradictions to the apprehensions of that there would be shrink in profit margins of exporters due to emergence of strong rupee, the latest studies of ASSOCHAM exhibit that stronger rupee will bring in rich dividends for India Inc and boost its profit margins between 12-15% in long run as exporters are brininging new technologies with cheaper imports for expanding their existing capacities.

The sectors that are likely to gain from rupee becoming stronger are presented in the following table.

Name of the sector

% of inputs imported

Petro & Petro products


Engineering goods


Gems and jewellery


Drugs and pharmaceutical



The chamber holds that a strong rupee would reduce the cost of imports and would have some positive impact on those exporters which have large import content as witnessed from figures above. It further recommended that if companies are able to expand their capacities in rupee appreciating scenario, they would in the long run , definitely be in win-win situation as demand for Indian exports in developed countries would not slow down. The India Inc would be able to export at very competitive prices as a result of capacity building through technological advancements and increase in margins by 12-15%.



Indian policymakers are struck with difficult crisis. On one hand, the stronger rupee has benefited the economy by making imports cheaper. On the other hand due to both economic and political reasons policymakers cannot afford to ignore the problem of exporters. India‘s rapid export growth in recent years have been the major accelerator of economic growth.


If RBI intervenes  to stop rupee from appreciation further , it may turned out to  be a  boon for export oriented units and crate more employment  but at the same time this may also bring in inflationary tendency to the market. Therefore government is in dilemma of choosing between inflation and unemployment.

 There is a limited extent to which RBI can intervene in the foreign exchange market in the face of large sustained capital inflows; policymakers can stem rupee appreciation substantially by easing limits on domestic firm’s overseas investments or restricting inflows – for instance, through further control on ECB’s. The RBI has already taken tentative steps in this direction making it more difficult for Indian firms to borrow in foreign currency and eliminating the exemption from ECB limits which used be previously enjoyed by real estate firms.



As already seen from above that rupee has appreciated about by 10% in 2007 and we have also discussed some of its gloomy effects on exporters. Now we shall see discuss the effect of same on the some the major Indian industry sectors.


Unfavorable impact of rupee appreciation can be highly witnessed in Indian textile industry – which had a strong competitive position in textile exports to US. In the financial year 2007-08, exports fail to reach the set target of $ 25 bn. The industry witnessed decline in the domestic textile exports in the first half of year 2007. Although we can witness overall increase in imports by U.S by 5.70%, exports by Indian textile and apparel saw a decline by 0.21 %.

If we talk the scenario of investment in the textile sector, until recently our textile and clothing industry was not attracting much investment even from Indian companies. The reason was the perception that this industry had limited growth prospects. The opinion has now changed and domestic investments are pouring in. however FDI continues to be slow because improvement in the investment climate has not percolated to overseas investment. The image of the industry as potential destination for overseas investment in labor intensive manufacturing industry is still not very positive.

Impact of this stronger rupee can also felt on employment in textile industries for instance, almost 45000 jobs have been lost in Tirupur most of which are either badli or contract workers. According to CITI report on impact of textile export deceleration on employment around 2.72 lakh direct jobs and nearly 3.2 lakhs indirect jobs are lost in the fiscal year 2007-08.

 The domestic textile machinery has felt the pinch of rupee appreciation as they are underdeveloped and are preserves of SME’s. In the last financial year growth of most of the machinery companies is negative. Machinery manufactures are feeling heat of rupee appreciation, but the end users are not as much affected as they are importing machinery from china, Japan and European countries. Currency flucations in these countries is minimal as compared to dollar.

However in the current fiscal year of 2008-09 some brighter prospects can be seen for textile exports. The reason behind this positive change can address to factors like china’s strong currency appreciation and drop in the cotton production. These factors can help industry to fill the wounds of its worst period.

As in January the annual appreciation of rupee was over 11 % while, Chinese currency appreciated by 6.96%. But when the rupees average appreciation dropped to 8.36% in March, Yuan rose to 8.52. Apart from this china is facing increasing problems of labor cost and raw material prices.

Therefore all these factors ca turn out to have positive impact on Indian textile industry.




Indian IT sector has turned out to be one of the fastest growing industries in recent years. Due to availability of engineers and developers at low cost India has become one of the most preferred destinations of outsourcing IT products and services. But impact of rupee appreciation can be strongly felt in IT sector:

Large IT players

·         The topline is suffering, given large percentage of sales IT industry is export oriented.

·         For every 1% appreciation in rupee, the operating profit margins (OPM) fall by 40-50 basis points.

·         On a positive note India Inc is presented with a large scale M& A opportunity overseas.

BPO and relatively smaller players

·         BPO work in India is mostly being undertaken in an offshore model and hence been severely hit with rupee appreciation

·         According to NASSCOM president “large IT companies are in good position to absorb counter the effect. However BPO segment and small companies with lower margins will hard hit.

·         ITes companies will face additional burden to the extent of 25% with the STPI scheme  expiring in march 2009

There is a huge concern in front of IT companies of impact of growth in financial year 2008. The major concern is of small and medium sized IT companies. Any small rupee appreciation at current levels may not impact large IT companies in FY 2008 as they have ability to sprout surprises on the volume growth despite external and internal challenges. Large IT companies have better ability to hedge against rupee appreciation as against small and medium sized companies. The impact could be more eminent on small and medium sized IT companies. In addition large IT companies have been increasing their revenue shares in currencies other than dollar like pound and Euros which have been relatively stable with respect to the rupee, thus reducing overall impact of the rupee appreciation against dollar.

The other external factor which has been into discussions is the slowdown of US economy and its impact on Indian IT industry. There seems to be general consensus between the Indian IT players that such slowdown if not drastic, may actually be beneficial to IT firms in medium to long term.  In a slowdown tendency of the client is first to cut down the discretionary IT spending and secondly to reduce the cost of core IT spending. This is where Indian IT services players will score over their onshore global peers as they have ability to cut cost for their clients better than their peers.

Most large Indian IT players have been moving up the value chain and have become integral to the business of the client. To reduce dependence on the US, large players have been diversifying geographically and now have substantial business from European and Asia pacific markets. This gives these companies an added advantage over companies solely dependent on US markets. The impact of US slowdown may be more eminent for small and medium sized IT companies who tend to have large dependence on discretionary IT spending of the clients.

However the for last quarter results upto April 2008 shows that net profit margins are down confirming the indication of  impact of US slowdown on Indian IT sector.


The similar is the case with this industry too. Kanpur and the adjoining areas is the hub of Indian leather products and US exports account for nearly half of the regions leather trade revenue. The appreciation of rupee against greenback has led to the erosion of profit margin of industry from US shipments. Most of the companies have stopped taking fresh orders and decreased the number of employees as well as number of shifts of the remaining employees. Buried under financial debts many units have already shut their business, with no assignments coming their way, the remaining functional units are also almost out of business. The large agriculture and industrial base have been adversely affected by rupee appreciation. If this rise in rupee continued to be on roll India will lose its competiveness to countries like Bangladesh and china.


Out of the top sugar exporting countries in the world India is competing with china & Thailand in the region and their currencies are not appreciating as the Indian rupee thereby giving edge to those countries. The international sugar organization (ISO) has estimated a higher global sugar surplus of 7.2 million tones for the year 2006-07. The ISO in November, in 2006 pegged the surplus at around 5.8 million tones. In its quarterly report released February 2007, the ISO said that global sugar output is estimated at 160.2 million tones against consumption demand of 153 million tones.


Indian companies on the account of rupee appreciation close to 10% may lose their competitiveness to the competing countries like china and Eastern Europe. Rupee appreciation will impact the profit margins and loose their competitiveness on pricing. China in the region of with the mere appreciation of 1.82% will give tough competition as low cost drug producer. Erosion of prices of generics, non tariff barriers and appreciation of rupee are seen has hurdles to Indian pharmaceuticals exports.









The current year 2008 has started with sudden tide of depreciation of rupee. The rupee has lost its glory of invincibility that surrounded it over past one year. Between January and second week of February rupee depreciated against greenback by atleast 3%.


The basic puzzle that is revolving in our minds would what causes this rupee depreciation? The answer to this question lies in the simple demand and supply theory in economics. Swings in the rupee is much like swings in prices of rice or wheat are caused by changing equations between demand and supply of currency. The upsurge in demand for US dollars, for instance impel people to sell more rupees to receive dollars: this leads to a cheaper rupee. The recent spell of depreciation of rupee is the outcome of surging demand for greenback from oil importers. Oil prices have globally hit anew record of $135 per barrel on 22may 2008. Since oil is prices in dollar in global market and most of our crude oil requirements being met from imports from overseas, rising prices of crude oil meant that domestic oil companies will need more dollars to fund their purchases. This triggers rupee sales and dollar purchases thus leading to weakening of rupee

Impact of this depreciation

 The depreciation of rupee will turn a boon for all the exporters of goods and services like IT as they will able to recover their losses. However from a broader perspective the economic cost of depreciation of rupee in this scenario of global economic environment will outweigh the overall benefits. Six months ago observers were bullish and expected it to strengthen to Rs 36-37 against dollar. Following the fall over last few months, expectations are that it will continue to be weak.  Where Dollar has strengthened in recent months against many currencies, rupee on the other hand has fallen much more sharply than the others.

Currency movements in recent years have been influenced by largely three basic factors:

·         Current account deficit

·         Investment inflows

·         Central bank intervention

Add to this role of a few factors such as inflation, movement of major currencies and currency speculation to get a full picture. Undoubtedly, the single most factors behind the weakening of rupee is the steep rise in global oil price, which has thrown India’s trade balance out of gear. Oil price has already touch $135 barrel and is expected to touch $150 a barrel in near future. India’s crude import oil bill is expected to cross $ 100 billion in 2008-09. At the same time non –oil imports remain resilient on steady domestic demand. The surging oil import bill, continued strength in domestic demand and expectation of moderating export growth suggest that trade deficit may worsen to 10% of GDP this fiscal with current, with current account deficit shooting past 2% of GDP. Mounting imports of pricey oil and other commodities has led to heavy buying of the US currency by oil companies, non-oil importers and also by banks for non-deliverable forward (NDF) market arbitrage.


NDF is a derivative market, where foreign investors take a position on rupee dollar exchange rate in the overseas market. These markets mostly operate in Singapore and Hong -Kong and banks or companies with active subsidiaries or branches in these countries play in the market. Banks in India are buying dollars cheaper by 3-4 paisa in the one- or two-month forward to sell it at a higher spread in the overseas market and earn profit.


The recent depreciation of rupee has caught almost all off-guard. Apart from rise in oil prices, which has been the major factor behind rupee weakening, there are some other factors also which have made contribution towards this sudden tide:

·         Recovery of US dollar

·         Slowdown in capital inflows , which decreases the supply of dollar

·         Unwinding of positions that were betting on rupee appreciation to check inflation.


There is large demand for dollars in the market because of the international slowdown in capital markets; the inflow of FII money is slow hence creating a demand and supply mismatch. Therefore I cannot seek a quick reversion of rupee in near term.


Things which were pushing rupee in 2007-08 were heavy influx of foreign capital, these flows as unlikely to be as large as in recent years. A dynamical analysis of balance of payments is important for figuring out where rupee is headed. Surging crude oil import bill, continued strength in domestic demand and expectations of moderating export growth suggest that current account deficit will worsen this fiscal year probably to slightly more than 2% of GDP.The overall balance of payments surplus will probably narrow to a mere $24 billion (1.8 per cent of GDP) in 2008-09 after the peak of around $90 billion (7.6 per cent of GDP) estimated for last year.      

The reserve bank in recent months has been selling dollar to prop up the rupee. However, does not seem to be particularly worried about recent depreciation of local currency, despite of continuation of rising of wholesale and consumer price index related inflation. Many experts believe that the government and RBI are unlikely to step in strongly against the rupee weakness and might instead focus more on reviving exports and supporting the economy. They expect the rupee to remain at the current levels in the near future, if not depreciate any further.


All these factors point towards that rupee might slide in near future. Exporters may further delay converting their export earnings, thus increasing mismatch between demand and supply of dollar, and strengthening the case of further rupee weakness. As we know RBI‘s preference is for controlling volatility rather than exchange rate , rupee can further weaken to 43.5-44 against the dollar unless either global crude oil prices rise or there is strong improvement in the in the global risk appetite  that increases capital flows into India.



 According to the Goldman Sachs forecasts Indian rupee will drop down by 3.2% in next six months because rising oil cost will increase the import bill and double the nation’s current account deficit.


On the other side there are four factors which can moderate the rupee weakness. These are global dollar, growth optimism, capital inflows and reserve bank.

·         The dollars global weakness is apparent whichever continent you look at. Euro, yen Canadian and Australian dollar, Brazilian real and Egyptian pound continues to strengthen. Only the Korean won and Indian rupee may be the exceptions.

·         Secondly continuous optimism about India’s GDP growth from domestic and international investors.

·         Thirdly as the global credit crunch gradually recedes, capital inflows into India in the form of FII & FDI will gradually improve.

·         Lastly if RBI ease or remove restrictions from ECB’s, there many Indian corporate who will seek cheap overseas funds. Though due to the tight global credit market ECB’s inflow won’t be as robust as in 2006.



The rupee gained by almost 20% in the last 2 years but lost 8% in the past six months. Hence medium to longer term outlook for rupee is further strengthening.


It is not right if we use words like fundamentals for currency. Unlike real assets , which produce real returns and hence can convincingly produce real discounted value of future streams of returns , there is no fundamental objective value for currency. There is real effective exchange rate based on purchasing parity. But reversion to those levels happens only over a medium or longer term.


Therefore summing up it can be concluded that rupee may regain its upward momentum in medium to long term period. But from this scenario there is a lesson to be learnt that even currencies that are expected to appreciate sometimes go off-course. Therefore get used to flexible exchange rates and manage risk in a better manner.



Manish Marwah